Recently, policy makers have focused significant attention on the use of financial rewards as a means of encouraging whistleblower reporting, e.g., the Dodd-Frank Act. While such incentives are meant to increase the likelihood that fraud will be reported in a timely manner, the psychological theory of motivational crowding calls this proposition into question. Motivational crowding warns that the application of financial rewards (an extrinsic motivator) can unintentionally hijack a person's moral motivation to “do the right thing” (an intrinsic motivator).

Applying this theory, the authors conducted an experiment and found that, in certain contexts, incentive programs can inhibit whistleblower reporting to a greater extent than had no incentives been offered at all. They discuss the implications of our results for auditors, audit committees, regulators, and others charged with corporate governance.